Public sector governance – part 1

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There is a new section of the Paper P1 Study Guide for exams from December 2014 onwards. It is on public sector governance and is included as a new addition under section A9. The purpose of this article is to introduce these topics and give some pointers as to what the important themes are in terms of teaching and learning.

There are four new sections (A9a, b, c and d) with each covering an important element of public sector governance. In this article, and a subsequent one, these themes will be covered in the order that they appear in the Study Guide. We will begin with considering the new section A9a:

What is the ‘public sector’?

In what economists call a ‘mixed economy’, there is a range of organisations. Some are business organisations and exist to make a profit; others are charitable or benevolent in their purpose, and another type is referred to as public sector. Not to be confused with ‘public companies’ (which describe the public availability of their shares), these are organisations that are, in some way, connected to, or deliver, public goods and services. This means that they help to, in some way, deliver goods and services that cannot be, or should not be, provided by ‘for profit’ businesses.

In most cases, public sector organisations are operated, at least in part, by the state. A state, not to be confused with a government, is a self-governing, autonomous region, often comprising a population with a common recent or ancient history. A state has four essential ‘organs’ without which it cannot fully operate: the executive (or government), the legislature, the judiciary and the secretariat (or administration). Because national constitutions vary, it is not possible to give general examples of how these ‘work’.

In the UK, by way of example, however, the head of state is the reigning monarch and the head of government is a different person (the prime minister). The head of government leads the executive, and the head of state is largely a ceremonial position, but in other countries, he or she also has a role in government. The legislature formulates and passes statute law, which the judiciary (the system of courts) interprets and enforces along with other non-statute laws called common laws. In a democracy, the legislature is largely elected and the judiciary is independent of government so that, if necessary, the judiciary can bring a legal case against the government or members of it.

The state’s secretariat or administration is by far the largest of the four ‘organs’ and is responsible for carrying out government policy and administering a large number of state functions. Again, the roles carried out by the secretariat depend upon the country’s constitution but these typically include education, health, local authority provision, central government, defence, foreign affairs, state pensions, tax collection and interior issues such as immigration, policing and prisons. For the most part, organisations such as these are funded by revenues from the state (mainly taxes) and they exist to deliver public services that cannot, or – in the opinion of the government – should not be provided by the private sector (the name given to businesses funded by private capital).

In most developed countries and in many developing countries, the public sector is very large. In the most developed countries, the state spends over 40% of the country’s domestic product and this figure is over 50% in some cases. In the UK, for example, the public sector accounts for around a quarter of all jobs. Accordingly, then, the public sector is very large and accounts for many different organisations delivering important services and employing, in many cases, thousands or even millions of people.

Agency in the public sector

One of the key concepts in corporate governance in the private sector is agency. This means that the people who manage a business do not own it, and in fact manage the business on behalf of their principals. It is said that management has an agency relationship with the principals in that they have a fiduciary duty to help the principals achieve the outcomes that they (the principals) seek. In a private or public incorporated business organisation, the principals are shareholders and, in most cases, shareholders seek to maximise the long-term value of their shares. This is usually achieved by profitable trading and having strategies in place to enable the company to compete effectively in its competitive environment.

It is slightly different for public sector organisations. Those employed in the public sector work just as hard as those in the private sector and have objectives that are just as clear (but are sometimes conflicting), but the principals are different. Whereas private and public companies have shareholders, public sector organisations carry out their important roles on behalf of those that fund the activity (mainly taxpayers) and those that use the services (perhaps pupils in a school, patients in a hospital, etc). Funders (ie taxpayers) and service users are sometimes the same people (for instance, taxpayers placing their children in state school) but sometimes they are not, and this can give rise to disagreements on how much is spent and on what particular provisions. Part of the nature of political debate is about how much state funding should be allocated to which public sector organisation and how the money should be spent.

In general, however, public sector organisations emphasise different types of objectives to the private sector. Whereas private companies tend to seek to optimise their competitive positions, public sector organisations tend to be concerned with social purposes and delivering their services efficiently, effectively and with good value for money.

A common way of understanding the general objectives of public sector organisations is the three Es: economy, efficiency and effectiveness.

Economy represents value for money and delivering the required service on budget, on time and within other resource constraints. It is common for public sector employees and their representatives to complain about underfunding but they have to deliver value to the taxpayers, as well as those working in them and those using the service.

Efficiency is concerned with getting an acceptable return on the money and resources invested in a service. Efficiency is defined as work output divided by work input and it is all about getting as much out as possible from the amount put into a system. It follows that an efficient organisation delivers more for a given level of resource input than an inefficient one.

Effectiveness describes the extent to which the organisation delivers what it is intended to deliver.

Forms of organisation

The entry in the Study Guide contrasts ‘public sector, private sector, charitable status and non-governmental (NGO and quasi-NGOs) forms of organisation’. The term ‘third sector' is sometimes used to refer to charitable and non-governmental organisations. The public and private sector are the first and second sectors, though the order of these – which is the first and which is the second – varies with who is writing. The third sector comprises organisations that do not exist primarily to make a profit nor to deliver a service on behalf of the state. Rather, they exist primarily to provide a set of benefits that cannot easily be provided by either profit-making businesses nor the public sector.

Organisations delivering international medical aid are a good example of non-governmental organisations (NGOs). Well-known NGOs such as Medicins sans Frontiers (‘doctors without borders’ in English) are large and well-structured organisations, delivering important medical aid in war zones and the like. Although supported by businesses and governments in their aims and activities, such NGOs are often mainly privately funded (eg by benevolent individuals) and do not operate under either a conventional business or public sector structure.

In such cases, NGOs and charities may have an executive and non-executive board, but these are subject to a higher board of trustees whose role it is to ensure that the NGO or charity operates in line with its stated purpose or terms of reference. In these cases, the agency relationship is between the NGO or charity, and its donors. When donors give to NGOs or charities, it is important for them to be reassured that their donation will be responsibly used for its intended purpose and the board of trustees help to ensure that this is what happens.

A question in the June 2011 Paper P1 exam gave an example of a poorly managed charity, the Horace Hoi Organisation (HHO), where one individual (Horace Hoi) misused funds donated to the charity for personal enrichment. An effective board of trustees could have helped to ensure that donated funds were used for their intended purposes (for HHO, it was to prevent animal suffering).

In some cases, NGOs can be funded by a government but remain semi-independent of the government in their activities. It might be, for example, that a government is seeking to provide a certain service (eg regional support of businesses) but wants to ensure, because of the importance of that service, that its delivery is free from – and seen to be free from – any political interference. If a government wants to be free from the accusation, for example, that a local business-support decision was based on political advantage for the governing party, it might give a publicly funded organisation effective autonomy in its decision making, even though it is helping to implement government policy.

These organisations are sometimes referred to as QuANGOs – quasi-autonomous non-governmental organisations. QuANGOs are sometimes accused of being unaccountable for their decisions because they only weakly report to the government (and the taxpayers) who fund their decisions. But that is partly the point of a QuANGO: it accounts to many principals including local stakeholders, central government and national taxpayers. QuANGOs can be politically awkward and, accordingly, their use in the public sector changes over time.

Public sector organisations themselves can take several forms. In each case, they are directly responsible for delivering part of a government’s policy and are, in most countries, under the control of the government. This means that they are under ‘political control’ in that people in government with a political agenda partly control their objectives and activities. In many countries, politics divides along a ‘left-right’ split while, in others, political divisions are more concerned with ethnicity, culture or religion. In some countries, for example, universities are funded mainly by governments, while, in others, they are mainly private institutions. It is similar with healthcare and schools – in some countries, these are under central government control and funding while, in others, they are privately funded and citizens must pay for services directly or through insurance.

Lobbying and lobby groups

In a democratic society, one in which political priorities are publicly debated and governments change with the collective will of voters, a range of external interests seek to influence public policy. In some cases, external interests coalesce around a certain opinion and it seems appropriate, to some, to campaign to influence government policy in favour of their particular vested interest. When organised specifically to attempt to influence government policy or the drafting of legislation (statute law), such interests sometimes ‘lobby’ politicians to try to get them to vote in the legislature in favour of their particular interest. These ‘lobby groups’ may attempt to influence in favour or against a wide range of issues and, although their activities are legal, some argue that they are not always helpful because it is thought by some that those that are the best funded will be the most likely to be heard. This can act against the public interest and in favour of sectional interests and this is thought to not always be helpful to the democratic process.

Stakeholders in the public sector

Several questions in previous Paper P1 exams have examined the complexities of stakeholders for a private sector (ie business) organisation. Public sector organisations have, in many cases, an even more complex set of stakeholder relationships than some private sector businesses. Because most public sector activities are funded through taxation, public sector bodies have a complicated model of how they add value. For a private business, revenues all come from customers who have willingly engaged with the business and gained some utility for themselves in the form of benefit from goods or services.

With a government, however, taxation is mandatory and may be paid against the wishes of the taxpayer. Citizens of a country might disagree with the levels of taxation taken by a government, especially when a taxpayer sees most of his or her tax being spent on causes or services that mainly benefit others (and not themselves) and with which they may disagree.

Political theorists have long discussed the importance of a social contract between the government and the governed. In this arrangement, those who pay for and those who use public services must all feel that they are being fairly treated and not being over-exploited nor badly served. Because there are so many claims to balance, then, the stakeholder pressures on a government are often very difficult to understand.

Furthermore, the claims of some stakeholders are assessed differently by different people according to their particular political stance. This means that some stakeholder claims are recognised by some but not by others, and this can make for a very complex situation indeed when it comes to deciding which stakeholder claims to recognise and which to reduce in weight or ignore. Some stakeholders have a very weak voice, while others have no effective voice at all in order to express their claim. Part of the debate in politics is the extent to which these weaker stakeholders are represented and how their assumed needs are met.

Part 2 of this article will consider the other new topics introduced under section A9 of the Paper P1 Study Guide.